ET:Yuan closes at 6.3049 per dollar but traders wary of bets on appreciation
The yuan edged up on Tuesday, extending a month-long holding pattern that has left traders scratching their heads about the near-term direction of the exchange rate.
Spot yuan closed at 6.3049 per dollar on Tuesday, 72 pips stronger than Monday's close.
The dollar/yuan rate has churned within a narrow band of 6.30-6.32 since late December, and market participants are split over what will happen next.
While appreciation expectations have recently picked up in the NDF market, onshore traders are agnostic about near-term appreciation. They do not rule out appreciation in the lead-up to Chinese Vice President Xi Jinping's visit to the United States on Feb. 14, but most prefer not to hazard a prediction.
LINK TO DOLLAR INDEX FADES
One hint that the range trade may continue lies in the link between the central bank's daily midpoint and the widely-used dollar index. The central bank often uses the index as a reference point for setting its fix; when the dollar weakens, the central bank sets a stronger midpoint, and vice versa.
But while direction of the dollar index is usually a reliable guide to the daily direction of the midpoint, the extent to which the central bank matches the magnitude of the change in its midpoint to the magnitude of the dollar index changes varies.
Sometimes the percent change in the two figures is nearly equal, while other times the central bank holds its midpoint steady in the face of large fluctuations in the dollar.
In the last three weeks, the midpoint has stayed in a narrow range, even as the dollar index has weakened considerably, mainly due to a rally in the euro. Some traders take this as a sign that the central bank does not intend to let the yuan appreciate, since the PBOC did not use the recent weakening of the dollar as an opportunity to guide the yuan higher.
Indeed, the dollar index hit a recent high on Jan. 16, but had fallen 3.1 percent by Tuesday in China. But the central bank's midpoint of 6.3116 on Tuesday was only 0.1 percent stronger than 6.3250 on Jan. 17 following the overnight high in the dollar.
"The midpoint has a definite role in guiding market expectations. The euro has been quite strong recently, but the midpoint has barely come down at all," said a currency trader at a city commercial bank in Shanghai, referring to the stronger midpoint that might have been expected in response to the fall of the dollar versus the euro.
